Merger and Acquisition: Ultimate Guide with Real-world Examples

In a business you may find yourself in a need of growing and expanding your business entity by joining it with other business entities of your choice. 

The   good news is that the law has set proper legal procedures to make sure you complete that mission successfully.

The legal processes which regulate joining of two different business entity example your company or firm and another company/firm for the purpose of forming a larger business entity is known as merger and acquisition. Popularly presented as M&A.



If it is your first time hearing those terms don’t worry. My purpose here is to avail to you everything you need to know about M&A with real-world examples.


    What is Merger and Acquisition/ M&A?

    It is very common that we see these words are used together, but in a real sense these are two different words with different implications.

    Here is how

    Merger refers to the process through which two business entity joins together and forms one new bigger entity.

    For example, A AND B CO. LTD and C AND D CO. LTD may join together and form ABCD CO. LTD

    A real example of a merger is when In US, Newmont Mining Corp was merged with Canadian counterpart Goldcorp Inc in April 2019 to form a new entity named Newmont Goldcorp.


    Types of Mergers

    Mergers can be categorized as
    • Horizontal Mergers
    • Vertical Mergers
    • Conglomerate mergers


    Horizontal Mergers

    Horizontal Merger is a merger occurring between companies producing and selling similar goods or offering similar services.

    An example of a horizontal merger is the merger between Newmont Mining Corp and Goldcorp is a horizontal merger since both entities carry mining business.

    Horizontal Merger is a merger between competing firms. 

    This type of merger raises competition concerns as they usually increase concentration levels in a relevant market.

    Vertical Mergers

    Vertical Merger is a merger occurring between firms operating at different stages of production.

     Example of a Vertical Mergers is a manufacturer of bottled milk buys a dairy farm.

    Vertical Mergers usually increase economic efficiency, although they may sometimes have anticompetitive effects.

    Conglomerate Mergers

    A conglomerate merger is a merger between two firms in unrelated businesses.

     Example of a conglomerate merger is a merger between an automobile and food processing firms.

    The conglomerate merger may facilitate anticompetitive practices through cross-subsidization of less profitable activities aimed at driving out competition and reciprocal.

    Acquisition


    Acquisition is the process through which one business entity acquires the assets of another business entity. The acquiring entity takes over the acquired entity and established itself as the owner of the acquired entity.

    Example of the acquisition is when Facebook Inc. acquired WhatsApp in February 2014 and Instagram in April 2012.

    Facebook acquisition statistics


    Number of Acquisition was done by big Companies since their establishment as reported by different sources up to April 2020



    COMPANY NAME
    NUMBER OF COMPANY ACQUIRED
    Google
    228
    Amazon
    101
    Apple
    104
    Twitter
    58
    Microsoft
    230
    Facebook
    83
    Yahoo
    128
    Dell
    61
    eBay
    66
    Sony
    41
    Adobe
    51
    Blackberry
    39

     Reasons for Merger and Acquisition

    Up to this juncture you may ask yourself, is merger and acquisition important? Why should I merge or acquire a company? Is merger and Acquisition worth it? Why all those big companies shown above have merged and acquire so much?

    The following are the reasons why merger and acquisition is important

    • Growth
    • Competition Advantage
    • Productivity and Efficiency
    • Save time and resources


    Growth

    Importance of merger and acquisition -growth

    Growth is a major advantage of merger and acquisition to both acquirer and target. 

    Through M&A a company may increase its share capital, expand its coverage, and adopt new technologies and system which may lead to high-quality service and attracts more clients.

    Mathematically we can say quality service + more clients = more revenue and growth.

    The good example which demonstrates how M&A enhances the growth of a company is Amazon.

    Amazon has acquired company /service like Audible, IMDb, BookPage, etc. to enhance the quality and quantity of their services.

    Further, Amazon on August 19, 2004, Acquired Joyo.com of china for $75,000,000 and use and integrate it as official Amazon in china. This allows Amazon to expand its coverage.

    Competition Advantage

    Merger and acquisition must be done in a way that does not affect competition in the market. That’s why every M&A transaction must be recognized and approved by relevant authorities just to protect anti-competitive practices.

    Despite the fact, M&A if done properly it has a lot of competitive advantages from different perspectives.

    The company may want to expand into different markets where a similar company is already operating, instead of starting from scratch it may acquire/merge with the rival company to minimize starting hustle and strengthen competition muscles. 

    Yoyo.com and Amazon example is relevant here.

    Facebook Inc also gained a lot of competitive advantage when it acquired the other largest social network in the world i.e Instagram and WhatsApp.

    Through M&A Facebook is able to compete with other social networks in the world like Twitter and Snapchat.

    Through M&A Facebook was able to defuse the competition and enhance cooperation from Instagram and WhatsApp.

    Productivity and Efficiency

    Merger and Acquisition enhances productivity and efficiency by allowing the company to use and integrate any relevant and useful services into their business.

    Example Google has acquired YouTube for $1.65 billion to increase its productivity.

    Also in 2013, Google acquired Waze whereby Google use and integrated Waze social features like crowdsourced location in Google Maps. This enhances efficiency in service offered by Google maps.

    In  2014 Google purchased DeepMind Technologies. DeepMind aids in Google's recent growth in the artificial intelligence and robotics community.

    Save Time and Resources

    M&A Save Time and Resources

    Instead of a company conduct research and any other analysis on a certain service or a product which cost a lot of resources and time it may save that resources and time by merging or acquiring a company which has already have the service or products that they seek.

    Example Google and YouTube acquisition

    Similarities between Merger and Acquisition


    • The major similarity between merger and acquisition is that both processes involve joining of two companies for the purpose of growth/expansion. 



    Growth/ expansion of business is the main goal in both merger and acquisition.

    • Both involve the complex procedure to make the deal done. The process of joining and harmonize systems of two joining companies are complex and it always takes a long time to complete.


    For example issues like management structure, IT systems, employment benefits, finance, and taxes must be settled out before completion of the deal.

    Difference between Merger and Acquisition

    The major difference between merger and acquisition is that in merger two companies join and the new company is formed example when Mining Corp was merged with Goldcorp Inc new company named Newmont Goldcorp was formed while in acquisition no new entity is formed but the acquiring company becomes the owner of the acquired company. For example, when Facebook acquired WhatsApp, no new entity was formed but Facebook becomes the owner of WhatsApp.

    Process and Steps for Negotiating, Signing and Closing an Acquisition Transaction

    The following are the basic chain of events when it comes to the acquisition transaction
    • Preliminary steps
    • Signing the definitive acquisition agreement
    • Moving toward the closing
    • Post-closing events


    Preliminary Steps

    • If you are a lawyer for the acquiring of the asset make sure that you do the following
    • Identify the Target company/ company need to be acquired
    • Make Preliminary due diligence through search in public domain sources e.g. company register sources
    • Conduct valuation and explore structurally alternatives. Here you have to get the help of other professionals which might include accountants, Valuers, etc.
    • Initiate Preliminary negotiations with Target Company
    • Sign a Legal contract/agreement that prohibits sharing information deemed confidential technically know as Non-Disclosure Agreement (NDA)
    • Begin in-depth legal and business due diligence
    • Obtain preliminary corporate approvals (generally board of directors) which properly drafted and must comply with the MEMART.
    • Letter of intent basically marks the end of preliminary steps


    Signing the Definitive Acquisition Agreement:

    Basic Types of Acquisition Agreements

    • Asset Purchase
    • Stock Purchase
    • Cash Merger
    • Stock Merger


    What the Acquisition Agreement Covers?

    • It describes the transaction structure, purchase price and procedures for closing
    • It Allocates risk between the buyer and seller for both known and unknown liabilities and obligations
    • Contains warrant and representations of the parties
    • Contains procedures for indemnification
    • Contains the extent of commitment to close the transaction


    What the Buyer/Acquirer Wants In Acquisition Transaction/Agreement?

    • Receiving what is expected at the closing
    • Good Title to the Purchased Assets or Stock
    • All of the Facilities, Individuals, Assets, Rights, Contracts and other Items Needed to Continue and Enhance the Business
    • The option to “bailout” if the business is not what has been represented or what is expected
    • Post-closing protection against contingent or unknown risks 

    What The Seller/Target/Acquired Wants In Acquisition Transaction/Agreement?

    • Certainty and speed of Closing
    • Receiving the Purchase Price without Risk
    • Not being at risk for the assets, liabilities or operations of the business after the closing
    • General Sections of Acquisition Agreements
    • Introduction and Description of Transaction
    • Consideration for Transfer of Business
    • Representations and Warranties of Seller
    • Representations and Warranties of Buyer
    • Covenants of the Parties
    • Conditions to Closing
    • Termination Procedures and Remedies
    • Indemnification

    In Signing the definitive acquisition agreement acquirer counsel prepares and the draft definitive acquisition agreement. 

    • In the agreement, a lawyer will define/ find issues that need to be negotiated
    • Acquirer presents the draft definitive agreement to the Target
    • Negotiate definitive agreement
    • Once the negotiation has been conducted Acquirer counsel prepares a certain agreement known as the Escrow Agreement.
    • Target prepares disclosure schedules, possibly capitalization tables so that to be surveyed by the Acquiring Company.
    • Negotiate and finalize all agreements
    • Hold board meeting(s) to approve the transaction.
    • Sign the definitive agreement, deliver disclosure schedules

     Moving toward the closing:

    • Closing the transaction is the last stage. It involves notice to the public so as people should know what happened to the company.
    • Prepare shareholder proxy statement
    • Apply for required governmental consents and approval.

    For instance if someone wants to    acquire company in Tanzania he has to apply and get a Dar es Salaam Stock Exchange (DSE), Capital Markets and Securities Authority CMSA and  Fair Competition Commission (FCC) approval.

    • Obtain required third party consent.
    • Finalize all related transaction agreements and officer certificates
    • Exchange final executed agreements, legal opinions, and officer’s certificates
    • Make necessary filings
    • The deal is closed when all required transaction document is accepted and approved by the relevant authority. 

    List of selected countries and relevant authority which deals with M&A transactions





    Post-closing events

    • Announce closing
    • Satisfy any post-closing covenants
    • Acquirer integrates Targets business with its own 

    Conclusion
    With globalization and rapid growth of science and technologies many companies want to get big and bigger thus numbers of M&A transactions are astonishingly increase.


    That data demonstrates how M&A are important concepts when it comes to business growth.

    Hope you find this article useful. Help me to spread this knowledge by sharing this post. Thank you!

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